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The Two Sides of Net Neutrality

Over the last decade or so the telecoms industry has been at loggerheads with the content providers and distributors (OTT companies) regarding the use of the infrastructure by the OTT players. On one side we have the people arguing for net neutrality (leave the OTT players alone), and on the other we have the telcos wanting to charge certain players for using their network.

The whole issue came to a head, when in mid April the FCC decided to allow telecom operators (or ISPs as they are called in the USA) to charge content providers for higher quality services.

Wholesale access to infrastructure

First of all it is important to analyse the reasons behind this hostility between the two parties.

The telecoms infrastructure is still largely dominated by national telecom operators who have for too long been able to extract exorbitantly high charges for the use of their network. Wherever possible corporates, ISPs, ICT providers and others have invested substantially in bypassing those networks. Even today many of these incumbent players do not offer proper wholesale services to other parties in the market; they maintain their preferred ‘retail minus’ rather than the ‘cost plus’ option. Several of these OTT providers have since built their own infrastructure, especially in areas where the telcos failed to move in early (server farms, cloud computing, data centres). At the same time telcos have moved more into data services—some more successful than others—and both groups are now at each throat in their competition battles.

In many countries over the last decade regulators have forced the operators to open up their networks, mainly through bitstream services (ISPs renting DSLAM ports from the operators) and local loop unbundling (ISPS putting their own DSLAMs often with their own backhaul), but there still remain significant legacy problems with the old approach—and in the USA, for example, wholesale access simply never happened. Instead, since the regulatory changes in America in 1996 the internet, and access to it, are now intertwined by default. The FCC completely abandoned the theory that there is a layered infrastructure implementation and treated the internet as a uniform, vertical information service that is unregulated.

The American obstacle

Because of the powerful position of the USA in global affairs this parochial issue, which in fact only relates to the USA, has unfortunately now become a global issue, since it is difficult for America to accept that their regulatory situation is out of step with the rest of the world. With all of the major OTT players being in the USA, all of those companies now have a tainted view of the subject—hence their militant stand on the regulatory situation in bodies such as the ITU.

The intertwined and complex situation of OTT regulations, net neutrality (NN) and internet governance should first be analysed and split into the different elements; each of which will require its own unique approach to the problem, as well as its own unique solutions. For example, the NN issue should be split (as the rest of the world is already doing) into a telecom element, being access and interconnect, into infrastructure, and into another element, internet content.

With the FCC ruling on NN, the question will be how they will be regulating this service. For example, services can’t be offered on a discriminatory price basis nor can the telcos favour themselves. Also it looks like there is an incentive for these operators to not invest in their infrastructure unless they can charge for premium services, as the FCC has indicated that the operators can only charge if their infrastructure can’t handle those OTT services.

At a higher level however, in order for this to work properly the FCC will have to split interconnection from internet services, early comments from the Chairman of the FCC, clearly shows that he is aware of this situation but the question is will he do something about this?

Once an open and competitive infrastructure wholesale environment is available there should be no reason for telcos to negotiate commercial arrangements for extra services.

An affordable general-purpose network

With telecoms networks largely being natural monopolies, access and interconnect will in most situations require regulation; but, from a telecoms perspective, content (internet) is an unregulated market.

Once we have split the two it becomes much easier to start looking at how to improve the market for the telecoms operators.

Financial institutions (e.g. superfunds) have great problems investing in the current vertically integrated models as within such a structure there are different business models and risk profiles. The same would apply for anybody else (eg OTT) wanting to invest in such intertwined telecoms business, this is one of the key reasons why they prefer to invest in infrastructure that allows them to bypass as much as possible those vertically integrated telcos.

Once we separated these issues we can look at different models and structures which can be used to better address that investment issue. OTT players and others have argued on many occasions that they are unwilling to ‘fund’ inefficient vertically-integrated infrastructure and other telco inefficiencies. Google has put its money where its mouth is by building networks to show that this can be done in a more cost-effective way than fixed operators are currently achieving. Already there is evidence in the USA that this is having a positive effect on other fibre roll outs in this country.

This argument against vertically-integrated business models is a valid one and obviously if the telcos don’t transform themselves in order to better align with the digital economy in which the OTT players operate the issue will remain conflicted.

At an infrastructure level, the position of the telcos should be something along the following lines…

They need to be able to create an affordable general-purpose networking environment. This should be made available on a non-discriminatory basis to both end-users and application developers. Whilst we must work within technical, legal and historical constraints this approach is essential in order to provide social and economic benefits.

On the other hand the sole purpose of the internet is to serve its users and society, not the organisational needs of network operators, their suppliers, or government bodies. These issues need to be separated.

Anything beyond that would in principle be open for commercial negotiations.

Why should OTT players pay?

One of the arguments the OTT players are using is that these costs of infrastructure are actually borne by the end-users who have consciously upgraded their telecoms/broadband subscriptions in order to be able to get better quality and better user experiences from the internet services they like to use.

They also argue that obviously the system is working as telcos are still investing massively in infrastructure and are in general enjoying a good return for this. The users are happy as well, and they are paying more to the operators through higher usage and higher speed prices. And the OTT players are happy too, as improved infrastructure provides more and better business for them.

So why rock the boat?

Furthermore, they argue that it is their content and their services that are driving the growth in the market, from which the telcos also benefit.

Nevertheless some of the OTT players have now struck commercial arrangements with carriers in the USA that will see them paying extra for priority services.

There is no one-size-fits-all solution

In developed economies it can be argued that further telco transformation is needed in order to create the level of efficiencies needed for an affordable general purpose networking environment and a relaxation of the rules that will allow for commercial arrangements between operators and content providers.

However, no one can argue that in many developing economies a more efficient networking environment is already in place and that there are no significant monopolistic rents in place (user costs for calls are in cents and monthly ARPUs are in single digit dollar amounts). We also see that in many cases the mobile infrastructure is under severe pressure because of the enormous popularity of those affordable services. There therefore, potentially, exists a more acceptable environment where increased investment in this infrastructure could be co-funded by, for instance, the OTT players. For them to be able to sell their rich content services they need high capacity and good quality mobile broadband networks. It is in their own interest to make sure that these investments happen. We do see some good examples of co-funded infrastructure project in Rwanda. Their Social EDU project is a multi-stakeholders partnership between Facebook, EdX, Airtel, Alcatel, Nokia and the Government of Rwanda.

How to move ahead

Let’s go back to the intertwined issues and establish that these first will need to be untangled so that possible investments can be judged on the right business model and risk profiles, needed to asses such investments

It should also be in the interest of the OTT players to optimise the network for the digital economy, digital media, e-health, etc, and this creates a large number of new value-added infrastructure opportunities for the telcos.

Once we have an agreement on those basic infrastructure principles, and once we have established a basic, general purpose infrastructure there should be room for commercial discussions and negotiations aimed at seeking participation in the costs of building, improving and extending that infrastructure. It is interesting to see that also the European Union is moving in this direction. Also governments could be interested in taking part in these discussions especially for infrastructure investments that don’t have sufficient base for commercial investments. It is also in the interest of the OTT players that the infrastructure can handle the ongoing increased capacity needed for the rich media services that they want to provide and the many innovations they will want to introduce once the quality of the infrastructure improves. Collaboration could either happen through direct investments or through what we call commitment to buy ‘value-added infrastructure services’ from the operators (anchor tenants) specifically tailored to the services they require within their OTT business model.

We believe that telcos in the developing countries with efficient networks could be at the forefront of starting the dialogue with their colleagues in the OTT world to move this process further, and in a much more positive way than can be done at this point in Europe or the USA.

Preferable the case for the telcos to charge more will need to be won on merit, not on regulatory favours. They will have to prove that further infrastructure will be hampered, or simply will not happen at all, if the OTT players do not participate; and before the OTT players will even consider that, they will need hard proof for that.

And/Or the telcos will need to develop appealing wholesale services based on the quality needs of user applications and the required network performance. If these services are seen by the OTT players as a real value to their business (the value-added infrastructure services) they will be happy to pay for them. Having a good understanding of the needs of the OTT players and being able to offer them additional quality services could well be the best way forward.

By Paul Budde, Managing Director of Paul Budde Communication

Paul is also a contributor of the Paul Budde Communication blog located here.

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Great Article Paul Chris McElroy  –  May 5, 2014 2:06 PM

As an end user and someone who serves the needs of my small business clients, my issue is trust.

While the big providers split into two types of service, will they increase the speed by improving their network for those who pay, or simply do what is more profitable and just throttle everyone else while providing the current speeds to those who pay?

There’s nothing in the new regulations that I saw that would stop them from doing the latter. No actual penalty for being anti-competitive or throttling the speed for those who don’t pay.

Thx Chris Paul Budde  –  May 6, 2014 12:31 PM

I agree with you, but I do have trust in Tom. He has clearly stated that what you describe will be illegal. I know at this stage that remains a promise but I am confident that he will push on.

Yeah Chris McElroy  –  May 6, 2014 3:34 PM

I don't trust any government agency when they are vague about what will happen. It opens the door to lobbyists making sure that there are no teeth to it.

Nevertheless some of the OTT players have Frank Bulk  –  May 5, 2014 10:40 PM

Nevertheless some of the OTT players have now struck commercial arrangements with carriers in the USA that will see them paying extra for priority services.

I’m not aware that Netflix is paying for prioritized access—if that was the case, I suspect the FCC would investigate into possible Net Neutrality violations.  It’s my understanding that Netflix, rather than paying a transit provider to deliver content, is peering directly with the service provider’s infrastructure.

Netflix Paul Budde  –  May 6, 2014 12:33 PM

You are correct Frank, paying for priority would violate NN. It is still uncertain what was paid for what, it will be something along the line of a ‘managed service’.

My best understanding of what was paid Frank Bulk  –  May 6, 2014 12:52 PM

My best understanding of what was paid for was interconnection. Here's the best coverage I've found on the details: http://blog.streamingmedia.com/2014/02/heres-comcast-netflix-deal-structured-numbers.html

Thanks Paul Budde  –  May 6, 2014 12:57 PM

I will read this with interest Frank. The date is 27 Feb that was before the final deal correct?

I don't have the exact dates, but Frank Bulk  –  May 6, 2014 3:57 PM

I don't have the exact dates, but I believe that blog entry was posted after the deal was announced.

The post doesn't help much Chris McElroy  –  May 6, 2014 5:24 PM

When one person corrected the post about the relationship between Comcast and Cogent, the author, who stated he would answer comments never did dispute that correction, which makes most of the post a question rather than an explanation. Is the relationship between Cogent and Comcast as the post says or as the comments says? In the post it says; "The reason for the poor quality streaming is that Cogent refuses to pay Comcast to add more capacity, even though Cogent is taking Netflix’s money for the service. Cogent is charging Netflix for a service it can’t deliver. Some are arguing that Comcast should be the one to pay to upgrade that connection with Cogent since Comcast charges consumers to get access to the Internet and is double dipping by charging both the consumer and the content owner. In reality, they aren’t." The comment says; "This statement has multiple fallacies and shows a complete lack of understanding of how transit over the internet is provided and billed for. Cogent is a service provider, whos customers are both Netflix and Comcast. Comcast pays Cogent to be able to access the rest of the internet *through* cogent, and Netflix also pays Cogent to be able to reach the rest of the internet *through* Cogent. Cogent's network (which is their only responsibility) is capable of handling Netflix's data demands, and is the service that Netflix pays Cogent for. Cogent is *not* a customer of Comcast, their relationship is the other way around, and they are not equal peers. Comcast's customers are internet users such as myself. *I* pay Comcast to be able to reach the rest of the internet through Comcast and the transit providers that Comcast is a customer of. Therefore, Comcast is the party that is failing to provide the service the advertise, which is a certain transfer rate, to the *entire* internet." So which is true?

My limited understanding is that Netflix was Frank Bulk  –  May 6, 2014 7:29 PM

My limited understanding is that Netflix was paying Cogent for transit service, but that Comcast and Cogent were peering with each other. If that's the case, if Comcast felt the peering relationship wasn't equitable (by whatever standard Comcast might have used), I can see how Comcast wouldn't want to expand interconnect capacity with Cogent.

Distrust Paul Budde  –  May 6, 2014 9:57 PM

That is a healthy position to start from Chris. But after nearly 2 decades of disastrous telecoms regulations we should be up for some better times now :) I also have so far not been able to get a good understanding of the Netflix deal, too much interpretations but not enough facts.

I hope so Chris McElroy  –  May 6, 2014 11:44 PM

Thanks Paul. But the FCC and other 3 letter agencies haven't exactly fostered trust in recent years. My understanding of their mission is to foster competition and protect consumers through that. The FCC allowed big media to consolidate more power, letting them own more types of media in each city, etc. which neither fostered competition nor protected anyone. So having trouble believing they know their core mission. I won't even go into the other 3 letter words.

FCC Paul Budde  –  May 7, 2014 3:39 AM

I know Chris and you are right. My only defense for being a bit more optimistic is that I know Tom personally and also that is a weak argument as within the political situation in the US anything is difficult, even the best people have little room to move forwards.

Nevertheless we do need keep the pressure on because eventually things will have to change!

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